Reparation, Inter–Ally Debt, and International Trade

It is fashionable at the present time to urge a reduction of the Allies' claims on Germany and of America's claims on the Allies, on the ground that, as such payments can only be made in goods, insistence on these claims will be positively injurious to the claimants.

That it is in the self–interest of the Allies and of America to abate their respective demands, I hold to be true. But it is better not to use bad arguments, and the suggestion that it is necessarily injurious to receive goods for nothing is not plausible or correct. I seek in this chapter to disentangle the true from the false in the now popular belief that there is something harmful in compelling Germany (or Europe) to “fling goods at us.”

The argument is a little intricate and the reader must be patient.

1. It does not make very much difference whether the debtor country pays by sending goods direct to the creditor or by selling them elsewhere and remitting cash. In either case the goods come on to the world market and are sold competitively or coÖperatively in relation to the industries of the creditor, as the case may be, this distinction depending on the nature of the goods rather than on the market in which they are sold.

2. It is not much use to earmark non–competitive goods against the payment of the debt, so long as competitive goods are being sold by the debtor country in some other connection, e.g., to pay for its own imports. This is simply to bury one's head in the sand. For example, out of the aggregate of goods which Germany would naturally export in the event of her exports being forcibly stimulated, it might be possible to pick out a selection of non–competitive goods; but it would not affect the situation in the slightest degree to pretend that it was these particular goods, and not the others, which were paying the debt. It is therefore useless to prescribe that Germany shall pay in certain specified commodities if these are commodities which she would export in any case, and useless, equally, to forbid her to pay in certain specified commodities, if that merely means that she will export these commodities to some other market to pay for her imports generally. No expedient on our part for making Germany pay us, or on America's part for making us pay her, in the shape of particular commodities affects the position, except in so far as it modifies the form of the paying country's exports as a whole.

3. On the other hand, it does us no harm to receive for nothing the proceeds of goods, even when they are sold competitively, if these goods would be sold on the world's market in any case.

4. If the result of pressing the debtor country to pay is to cause it to offer competitive goods at a lower price than it would otherwise, the particular industries in the creditor country which produce these goods are bound to suffer, even though there are balancing advantages for the creditor country as a whole.

5. In so far as the payments made by the debtor country accrue, not to the country with which the debtor's goods are competing, but to a third party, clearly there are no balancing advantages to offset the direct disadvantages under 4.

6. The answer to the question, whether the balancing advantages to the creditor country as a whole outweigh the injury to particular industries within that country, depends on the length of the period over which the creditor country can reasonably expect to go on receiving the payments. At first the injury to the industries which suffer from the competition and to those employed in them is likely to outweigh the benefit of the payments received. But, as in the course of time the capital and labor are absorbed in other directions, a balance of advantage may accrue.

The application of these general principles to the particular case of ourselves and Germany is easy. Germany's exports are so preponderantly competitive with ours, that, if her exports are forcibly stimulated, it is certain that she will have to sell goods against us. This is not altered by the fact that it is possible to pick out a few exports or potential exports, such as potash or sugar, which are not competitive. If Germany is to have a large surplus of exports over imports, she must increase her competitive sales. In the Economic Consequences of the Peace (pp. 175–185) I demonstrated this at some length on the basis of pre–war statistics. I showed not only that the goods she must sell, but the markets she must sell them in, were largely competitive with our own. The statistics of post–war trade show that the former argument still holds good. The following table shows the proportions in which her export trade was divided between the principal articles of export, (1) in 1913, (2) in the first nine months of 1920 (the latest period for which I have figures in this precise form), and (3) in the four months June to September 1921, these last figures representing, I think, a not exactly comparable classification, and being provisional only:

It is clear, therefore, that, though raw materials other than coal, such as potash, sugar, and timber may yield a trifle, Germany can only compass an export trade of great value by exporting iron and steel goods, chemicals, dyes, textiles, and coal, for these are the only export articles of which she can produce great quantities. It is also clear that there have been no very marked changes in the proportionate importance of the different export trades since the war, except that the exchange position has somewhat stimulated, relatively to the others, those export lines, such as iron goods, machinery, chemicals, dyes, and glass, which do not involve much importation of raw materials.

To compel Germany to pay a large indemnity is therefore the same thing as to compel her to expand some or all of the above–mentioned exports to a greater extent than she would do otherwise. The only way in which she can effect this expansion is by offering the goods at a lower price than that at which other countries care to offer them; putting herself in a position to offer them cheap, partly by the German working classes lowering their standard of life without reducing their efficiency in the same degree, and partly by German export industries being subsidized, directly or indirectly, at the expense of the rest of the community.

These facts, formerly overlooked, are now, perhaps, exaggerated by popular opinion. For Principle (3), enunciated above, requires attention. Our industries will be subjected to strong competition from Germany, just as they were before the war, whether we exact Reparation or not; and we must not ascribe to the Reparation policy inconveniences which would exist in any case. The remedy lies not in the now popular nostrums for prescribing the form in which Germany shall pay, but in reducing the aggregate amount to a reasonable figure. For by prescribing the manner in which she shall pay us we do not control the form of her export trade as a whole; and by absorbing for reparation purposes the whole of a particular type of export, we compel her to expand her other exports to pay for her imports and other international obligations. On the other hand, we can secure from her moderate payments, on the sort of scale, for example, on which she might have been building up new foreign investments, without stimulating her exports as a whole to a greater activity than they would enjoy otherwise. This is the correct course for Great Britain from the standpoint of her own self–interest only.

The practical application of Principles (5) and (6) is also clear. So far as (5) is concerned, Great Britain is to receive not the whole of the indemnity, but about a fifth of it; whilst (6) provides the argument which to me has always appeared decisive. The permanence of reparation payments on a large scale for a long period of years is, to say the least, not to be reckoned on. Who believes that the Allies will, over a period of one or two generations, exert adequate force over the German Government, or that the German Government can exert adequate authority over its subjects, to extract continuing fruits on a vast scale from forced labor? No one believes it in his heart; no one at all. There is not the faintest possibility of our persisting with this affair to the end. But if this is so, then, most certainly, it will not be worth our while to disorder our export trades and disturb the equilibrium of our industry for two or three years; much less to endanger the peace of Europe.

The same principles apply with one modification to the United States and to the exaction by her of the debts which the Allied Governments owe. The industries of the United States would suffer, not so much from the competition of cheap goods from the Allies in their endeavors to pay their debts, as from the inability of the Allies to purchase from America their usual proportion of her exports. The Allies would have to find the money to pay America, not so much by selling more as by buying less. The farmers of the United States would suffer more than the manufacturers; if only because increased imports can be kept out by a tariff, whilst there is no such easy way of stimulating diminished exports. It is, however, a curious fact that whilst Wall Street and the manufacturing East are prepared to consider a modification of the debts, the Middle West and South is reported (I write ignorantly) to be dead against it. For two years Germany was not required to pay cash to the Allies, and during that period the manufacturers of Great Britain were quite blind to what the consequences would be to themselves when the payments actually began. The Allies have not yet been required to begin to pay cash to the United States, and the farmers of the latter are still as blind as were the British manufacturers to the injuries they will suffer if the Allies ever try seriously to pay in full. I recommend Senators and Congressmen from the agricultural districts of the United States, lest they soon suffer the same moral and intellectual ignominy as our own high–Reparation men, to invest at once in a little caution in their opposition to the efforts of Mr. Harding's Administration to secure for itself a free hand to act wisely in this matter (and even perhaps generously) in accordance with the progress of opinion and of events.

The decisive argument, however, for the United States, as for Great Britain, is not the damage to particular interests (which would diminish with time), but the unlikelihood of permanence in the exaction of the debts, even if they were paid for a short period. I say this, not only because I doubt the ability of the European Allies to pay, but because of the great difficulty of the problem which the United States has before her in any case in balancing her commercial account with the Old World.

American economists have examined somewhat carefully the statistical measure of the change from the pre–war position. According to their estimates, America is now owed more interest on foreign investments than is due from her, quite apart from the interest on the debts of the Allied Governments; and her mercantile marine now earns from foreigners more than she owes them for similar services. Her excess of exports of commodities over imports approaches $3000 millions a year;[110] whilst, on the other side of the balance, payments, mainly to Europe, in respect of tourists and of immigrant remittances are estimated at not above $1000 millions a year. Thus, in order to balance the account as it now stands, the United States must lend to the rest of the world, in one shape or another, not less than $2000 millions a year, to which interest and sinking fund on the European Governmental War Debts would, if they were paid, add about $600 millions.

Recently, therefore, the United States must have been lending to the rest of the world, mainly Europe, something like $2000 millions a year. Fortunately for Europe, a fair proportion of this was by way of speculative purchases of depreciated paper currencies. From 1919 to 1921 the losses of American speculators fed Europe; but this source of income can scarcely be reckoned on permanently. For a time the policy of loans can meet the situation; but, as the interest on past loans mounts up, it must in the long run aggravate it.

Mercantile nations have always employed large funds in overseas trade. But the practice of foreign investment, as we know it now, is a very modern contrivance, a very unstable one, and only suited to peculiar circumstances. An old country can in this way develop a new one at a time when the latter could not possibly do so with its own resources alone; the arrangement may be mutually advantageous, and out of abundant profits the lender may hope to be repaid. But the position cannot be reversed. If European bonds are issued in America on the analogy of the American bonds issued in Europe during the nineteenth century, the analogy will be a false one; because, taken in the aggregate, there is no natural increase, no real sinking fund, out of which they can be repaid. The interest will be furnished out of new loans, so long as these are obtainable, and the financial structure will mount always higher, until it is not worth while to maintain any longer the illusion that it has foundations. The unwillingness of American investors to buy European bonds is based on common sense.

At the end of 1919 I advocated (in The Economic Consequences of the Peace) a reconstruction loan from America to Europe, conditioned, however, on Europe's putting her own house in order. In the past two years America, in spite of European complaints to the contrary, has, in fact, made very large loans, much larger than the sum I contemplated, though not mainly in the form of regular, dollar–bond issues. No particular conditions were attached to these loans, and much of the money has been lost. Though wasted in part, they have helped Europe through the critical days of the post–Armistice period. But a continuance of them cannot provide a solution for the existing disequilibrium in the balance of indebtedness.

In part the adjustment may be effected by the United States taking the place hitherto held by England, France, and (on a small scale) Germany in providing capital for those new parts of the world less developed than herself—the British Dominions and South America. The Russian Empire, too, in Europe and Asia, may be regarded as virgin soil, which will at a later date provide a suitable outlet for foreign capital. The American investor will lend more wisely to these countries, on the lines on which British and French investors used to lend to them, than direct to the old countries of Europe. But it is not likely that the whole gap can be bridged thus. Ultimately, and probably soon, there must be a readjustment of the balance of exports and imports. America must buy more and sell less. This is the only alternative to her making to Europe an annual present. Either American prices must rise faster than European (which will be the case if the Federal Reserve Board allows the gold influx to produce its natural consequences), or, failing this, the same result must be brought about by a further depreciation of the European exchanges, until Europe, by inability to buy, has reduced her purchases to articles of necessity. At first the American exporter, unable to scrap all at once the processes of production for export, may meet the situation by lowering his prices; but when these have continued, say for two years, below his cost of production, he will be driven inevitably to curtail or abandon his business.

It is useless for the United States to suppose that an equilibrium position can be reached on the basis of her exporting at least as much as at present, and at the same time restricting her imports by a tariff. Just as the Allies demand vast payments from Germany, and then exercise their ingenuity to prevent her paying them, so the American Administration devises, with one hand, schemes for financing exports, and, with the other, tariffs which will make it as difficult as possible for such credits to be repaid. Great nations can often act with a degree of folly which we should not excuse in an individual.

By the shipment to the United States of all the bullion in the world, and the erection there of a sky–scraping golden calf, a short postponement may be gained. But a point may even come when the United States will refuse gold, yet still demand to be paid,—a new Midas vainly asking more succulent fare than the barren metal of her own contract.

In any case the readjustment will be severe, and injurious to important interests. If, in addition, the United States exacts payment of the Allied debts, the position will be intolerable. If she persevered to the bitter end, scrapped her export industries and diverted to other uses the capital now employed in them, and if her former European associates decided to meet their obligations at whatever cost to themselves, I do not deny that the final result might be to America's material interest. But the project is utterly chimerical. It will not happen. Nothing is more certain than that America will not pursue such a policy to its conclusion; she will abandon it as soon as she experiences its first consequences. Nor, if she did, would the Allies pay the money. The position is exactly parallel to that of German Reparation. America will not carry through to a conclusion the collection of Allied debt, any more than the Allies will carry through the collection of their present Reparation demands. Neither, in the long run, is serious politics. Nearly all well–informed persons admit this in private conversation. But we live in a curious age when utterances in the press are deliberately designed to be in conformity with the worst–informed, instead of with the best–informed, opinion, because the former is the wider spread; so that for comparatively long periods there can be discrepancies, laughable or monstrous, between the written and the spoken word.

If this is so, it is not good business for America to embitter her relations with Europe, and to disorder her export industries for two years, in pursuance of a policy which she is certain to abandon before it has profited her.

For the benefit of any reader who enjoys an abstract statement, I summarize the argument thus. The equilibrium of international trade is based on a complicated balance between the agriculture and the industries of the different countries of the world, and on a specialization by each in the employment of its labor and its capital. If one country is required to transfer to another without payment great quantities of goods, for which this equilibrium does not allow, the balance is destroyed. Since capital and labor are fixed and organized in certain employments and cannot flow freely into others, the disturbance of the balance is destructive to the utility of the capital and labor thus fixed. The organization, on which the wealth of the modern world so largely depends, suffers injury. In course of time a new organization and a new equilibrium can be established. But if the origin of the disturbance is of temporary duration, the losses from the injury done to organization may outweigh the profit of receiving goods without paying for them. Moreover, since the losses will be concentrated on the capital and labor employed in particular industries, they will provoke an outcry out of proportion to the injury inflicted on the community as a whole.